Not just a ranch: Bucks and acres

If most people looked at the Adobe Ranch,
they’d see a meadow with a creek and willows running through
it and sagebrush grasslands rising to pine forests. But Carl Palmer
sees a distressed asset that he and his partners were able to pick
up for a good price, with undeveloped revenue streams, and a
potential return on investment that could rival the stock market.

The Adobe Ranch is on the east side of the Sierra Nevada
in California, in a volcanic landscape called the Inyo Craters near
Bishop and Mammoth Lakes. It’s within 50 miles of Mammoth Ski
Resort, so it’s on the edge of development pressure. But
it’s still pretty far out.

And it’s a pretty
lonely place to find a newly minted MBA from the Stanford Graduate
School of Business staking his claim as a cowboy. But Palmer is
also a conservationist at heart, who believes economics and ecology
can work hand-in-hand. And he’s trying to prove it on the
Adobe Ranch.

The ranch is the first project of
Greenbridges, a company Palmer formed right out of school, which
seeks "to yield returns for investors while also conserving natural
resources, biodiversity, and open space." Whether he succeeds or
fails, his approach illustrates a way to look at ranching economics
and ways for ranches to survive, even if they move beyond ranching.
Palmer met his partners, traditional farm and ranch real estate
investors, through a classmate. They have put "several million
dollars" into the property, and they want to double their money in
five years. That’s roughly equivalent to a 14 percent return
each year. It’s about what a reasonably savvy investor can
make in the stock market in a good year. And it’s the kind of
return investors demand when they put their money into fairly risky
ventures.

So when Palmer looks at the ranch, he thinks
ROI — return on investment. ROI is a fraction, and like all
fractions, it has two components, he says. "You have a numerator,
which is the revenue stream. And the denominator is the asset
value, or your principal in the property if you don’t take
into account appreciation." The denominator is also sometimes
called the "basis," or how much capital you have invested in the
asset.

There are two straightforward ways to increase
ROI, Palmer says. You can increase the numerator: that is, get more
revenue out of the ranch, by producing more cattle or generating
fees through hunting or fishing. Or you can decrease the
denominator: Decrease the amount you have invested in the ranch by
getting some of your capital back, either by selling off pieces of
the ranch or by selling easements. "If you take out half of your
capital," Palmer explains, "you double your return."

Palmer wants to do both on Adobe Ranch. To reduce the denominator,
he hopes to put the ranch’s core riparian areas along Adobe
Creek in the federal Wetlands Reserve Program, which pays for the
agricultural value of the land in exchange for a permanent
conservation easement. The program also pays for restoration, which
will help; the ranch’s creeks were hit hard by a previous
owner, who increased the numerator by grazing more cattle than the
ranch could support.

Palmer also hopes to enter into a
land exchange with the Forest Service. The ranch has some isolated
meadows up in the forest fringes that can’t really be used
because the previous owner lost the ranch’s grazing permit on
the national forest. In such a deal, the ranch would offer the
private parcels to the Forest Service in exchange for public land
near Mammoth, which needs land for a hospital and expansion of the
growing town, currently hemmed in by public land. That land would
be sold and the money would go to the ranch.

Palmer also
plans to sell off a couple of parcels. One is a 40-acre parcel
right on Highway 120 that is currently listed for $340,000 —
almost 10 times the price per acre that Greenbridges paid averaged
over the entire ranch.

To increase the numerator in the
ROI equation, Palmer plans to open the ranch to recreational
fishing for German brown trout on the restored creek running
through the property. He plans to charge $100 for a half-day of
fishing to start, and increase the fee as restoration improves the
fishing. "The recreational revenue stream will very easily exceed
the ranching revenue stream pretty quickly," he says. He will
continue to graze around 300 to 400 cattle on the ranch — the
ranch is currently leasing grazing to a neighbor. But he
doesn’t expect to really be able to improve the ranching
revenue stream. "We’re lucky to generate a 1 to 2 percent
return," he says. "It’s not an economic return on what is a
valuable asset."

Palmer hopes that bringing people who
fish and love the outdoors to the ranch might also play into his
end game: selling the core of the ranch, with a conservation
easement on it, to a conservation buyer, someone who will value it
for its many layers of value, and not just as a ranch.

He
figures if Greenbridges can get 80 percent of the value back before
the Wetlands Reserve Program and the land exchange, he won’t
have to get "an astronomical price for the residual value."
He’ll just have to find someone willing to buy a restored and
protected ranch for around the price that Greenbridges paid for a
distressed ranch.

Can this approach work for a ranching
family that wants to stay on the land? The same principles of ROI
apply, says Palmer. "For a ranch on the edge of a booming
metropolis, this won’t work, unless there is someone with
deep pockets" — such as an environmental group or the
government — "willing to pay for an easement," Palmer says.
But "for ranchers who have a really low basis on their property,
the returns from a nontraditional approach like this can be
comparable to a traditional approach," he adds.

By "a
traditional approach," in this case, Palmer means subdividing and
selling the land in 40-acre parcels with a house, which he says
would be "an awful outcome."